What’s Equity Release?
Equity release refers to the action of unlocking the wealth tied up in your home. You’ll take out a long-term property-based loan (also called a later life loan) that’ll be repaid in full once you pass away or move into a long-term care facility.
Tip: With any equity release scheme, you don’t need to worry about what will happen to your partner once you’re no longer around. In the case of a couple, the property will only be sold once the last person passes on or goes into long-term care.
Whether in the form of a lump-sum or smaller instalments (referred to as a drawdown), the cash you unlock will be tax-free. This is because when you release equity, there’s no capital gain (which would have to be above the set threshold). After all, you’re borrowing money against your home.
Tip: Should you invest your money, any interest earned may be subject to tax so always be clear about your intentions when speaking to an advisor or solicitor.
Also, most equity release products will not require you to make any instalments during your lifetime.
Equity Release Can Be Used To:
- Consolidate your debts
- Overcome pension shortfalls
- Purchase expensive items such as caravans and vehicles
- Increase your standard of living during retirement
- Fund holidays and other leisure activities
- Make home improvements
- Assist a loved one financially
- Provide an early inheritance to your loved ones
- Repay your interest-only mortgage
There are two kinds of equity release plans available to you:
1. Lifetime Mortgage
The first type of equity release is a lifetime mortgage. This type lets you take out a mortgage on your home if it’s your primary residence. However, you will remain the owner. You’ll have the option to ringfence part of your property for your family to inherit.
You can also make repayments or let the interest increase. Better yet, if there’s any loan amount or any accrued interest, it’ll be paid back when you pass away or need long-term medical care.
2. Home Reversion
The second type is a home reversion, which means you sell some of your property or your whole property. You can sell it to someone like a home reversion provider, and they’ll pay you a lump sum for it, but they can also pay you in regular payments. It’s your choice.
Equity Release Interest Rates
Over the last few years, the interest rates on equity release have been generally higher than standard mortgage interest rates. Now that equity release rates have dropped it’s a different calculation. Some are as low as 2.65%, and that could be the agreed value for the life of your financial obligation. How great is that?
However, the amount of interest you pay at the end of your equity release depends on how long the scheme runs and the type of plan you choose. It’s important to remember that this will come to an end when you are ready to sell your land or move into permanent care.
What does this mean for you?
For example, with a limited lifetime mortgage, because you do not make any monthly repayments as the scheme goes on, this results in a mounting interest bill. Each year the interest due is added to the overall loan, and from then on, it accrues more interest. This is commonly known as ‘compound’ interest. The interest builds up on itself.
But listen up:
If you have a set interest value of 6% as it was in the past, an equity release accounts interest bill will grow twice the size after roughly 12 years. However, at the AMAZING current interest rate of around 2.25%, it will take substantially longer.
Let me tell you something.
It’s vital to be mindful of signing up for a plan with a “no negative equity” guarantee since it will ensure that what you owe to the lender can never exceed the value of your estate.
Moreover, by taking out an equity release plan with a drawdown, you can lower the amount of interest you will pay in the future rather than an initial lump sum.
If you take out a lifetime mortgage, you will generally be charged a higher interest rate than you would on an ordinary mortgage, and the amount you owe can multiply if the interest is rolled up.
That being said…
Lifetime mortgages are designed as a long-term arrangement with repayment made on the sale of the borrower’s home when they die or move into long term care. Some lenders will waive the early repayment charge for those who settle their lifetime mortgage because of a residence change. Some lenders will allow it to be repaid when the first borrower dies if the remaining borrower wishes to move and redeem the lifetime mortgage.
If you have a home reversion plan, you can decide to buy back your estate or a share in this but will need to pay full market value for it. Various plan providers offer multiple options, so it’s up to you to ensure that you get the most outstanding deal. Speak you an adviser and find out more.
For example, Aviva offers an allotted estimate of up to 3.75% interest ratio, More2Life gives up to a 3.40% predetermined toll, LV provides up to 6.04%, and Legal & General offer a set ratio of 3.40%.
You need to examine the entire package, not the valuation before deciding which is perfect for you.
What’s Rolled-Up Or Compound Interest?
Having rolled-up or compound interest1 on your loan means that:
- At the end of your first month or year (depending on your plan), the interest gets added to your original loan.
- At the end of the next month or year, the interest compounds. I.e. it gets added to the initial loan and the first month or year’s interest.
- This continues similarly throughout the full period of your loan. The interest continues accumulating.
- Although your interest rate is fixed, the total interest grows with the total of the loan.
Past Vs. Current Interest Rates On Equity Release
Equity release looked a lot different a few years ago, as it had a much higher interest rate. Today, it’s a lot cheaper, with some plans at an interest rate of 2.25%.
Let’s run some numbers to help make this clear.
If a customer released £20,000 @ 5.97% in 2015, the amount they’d owe after ten years is £35 715, while after 20 years it would be £63 780. Compare that to today’s interest rate. If you took out a plan at 2.25% in 10 years, you’d only owe £24 984! Remember that this assumes you have no monthly repayments at all!
|2015 (5.97%)||2020 (4.11%)||2021 (2.25%)|
|10 years||£35 715||£29 919||£24 984|
|20 years||£63 780||£44 758||£31 210|
PRO TIP: If you took out an equity release plan a while ago, at a higher interest rate, you must see if you’re able to switch to a lower interest rate one.
Is This Expensive? A Quick Case Study
If we look at the current interest rate of 2.25%, you can see that it’s much cheaper than in the past. This means that your property value has to go up by a meagre 2.25% and you can still get growth on your property as well as having taken out cash.
As per this article and prediction “Despite the economic uncertainty caused by the Covid-19 pandemic and Brexit”, the UK’s property market enjoyed a robust year in 2020. Here we look at the average house prices in London and the UK and predictions for the capital’s property market in 2021.
Let me tell you something…
Nationwide: London average reaches £486,562. In its latest house price index2, Nationwide reported that the annual house price growth “accelerated further” in December, reaching a six-year high of 7.3%, up from 6.5% in the previous month.”
What does this mean for you?
Even if properties only grow at 4% with a 2.25% equity release interest rate, your net property value will increase.
|YEAR||PROPERTY GROWTH||INTEREST AT 2.25%||NET GROWTH|
|5||£10 832||£5 883||£4 950|
|10||£24 012||£12 460||£11 552|
|15||£40 047||£19 810||£20 237|
- £50 000 today in cash from the equity release to spend as you wish.
- No repayments
- You’d remain in your home
- If property prices grow as expected, you will get another £20 237 in net property growth!
Let’s say you have a mortgage loan or equity release of £50 000 with a compound interest rate of 4%:
|YEAR||LOAN||INTEREST AT 2.25%||TOTAL OWED|
|5||£58 493||£1 316||£59 809|
|10||£71 166||£1 601||£72 767|
|15||£89 830||£2 021||£91 851|
Now, let’s look at the estimated property growth in the UK:
Well, if we look at the current interest rate of 2.25%, one could assume that it’s much cheaper than in the past. The average growth in the UK property market should outstrip equity release costs.
How To Access The Best Equity Release Interest Rates
While typical equity release interest rates sit at around 5%, increasing competition in the equity release space has forced providers to drop their rates. It’s currently at a staggering 2.25% – it’s never been that low! You can now access the best equity release rates in history – complete with extra built-in safety features like the no negative guarantee.
The rate your equity release company will offer you will depend on a handful of variable including your age and health, the value of your property and the prevailing market conditions.
To ensure you receive the best possible rate, you should use a financial provider that is registered with the Equity Release Council. They’re obliged to inform you whether or not they’ll deliver whole of market or selective offers.
Before consulting with a financial advisor, you may want to compare equity release rates online. You can do this by making use of one of the many comparison and rating websites.
There’s something you should know about.
When you compare the best equity release rates online, you may want to consider the annual percentage rate (APR) rather than the advertised or nominal rate. Why? Because the APR will include additional fees and costs while the advertised rate will not.
Knowing what equity release will cost you overall, including fees and additional costs, may help weed out products that carry excessive charges.
Is Equity Release Safe?
Luckily, in recent years, many rules and regulations are keeping you and your finances safe. You don’t have to worry about a thing!
In the late 1980s – early 1990s, equity release schemes had a bad name. This was due to increased corrupt industry practices. Several deceitful lenders undertook expensive deals that caused homeowners (and their properties) to owe them more than their homes’ value.
However, you shouldn’t worry!
These corrupt actions of the lenders caused uncertainty regarding equity release. People weren’t so keen on it anymore. On the other hand, this resulted in something positive as well. Industry regulations became more strict.
The Financial Conduct Authority (FCA) helped improve equity release processes due to their regulations and customer protection policies. Equity release is now so much safer than back then. Today, it’s an excellent way for someone who is aged 55 or older needs extra cash quickly.
Equity release schemes or plans are monitored and controlled by the Financial Conduct Authority (FCA). Most providers out there are also members of the ERC (Equity Release Council), a trade body with high standards and the best customs and procedures for equity release companies and financial advisors.
To make sure you’re choosing the right plan, the council states that:
- Rates need to be fixed, and if not, the provider must have a maximum limit for the loan’s lifespan.
- You are allowed to live on your property your whole life or until you need long-term care. You simply need to abide by the rules of your equity release plan.
- You can move house, as long as your lender has approved the new property and that it offers the same amount of security for your equity plan.
- Lifetime mortgage plans need a ‘no negative equity’ guarantee. This means that when your property gets sold, and you get less than your loan, you won’t have to pay in the balance. Please also take solicitors charges and agents fees into account.
- The Equity Release Council safeguards you with their strict help on the sales process. They also allow you to take out an equity release plan if you have adequate financial support or advice from independent money advice services.
Let’s cover no negative equity guarantee quickly.
No Negative Equity Guarantee
This guarantee protects you so that you don’t pay more than you owe to your equity release provider. However, when your lifetime mortgage plan comes to an end, the lender will sell your house and settle the loan amount plus any interest.
Let me tell you something.
If the estate market value decreases and the money can’t repay your mortgage, the lender won’t request more cash from your estate or heirs. Since you’ll be protected by the ‘no negative equity guarantee’, they aren’t legalised to do so. Therefore, consider the equity release firm that will offer you this protection.
All The Charges When It Comes To Equity Release
The initial costs you need to pay to access your equity release is dependent on your provider and the product/plan you choose.
You’ll need to budget for these three services when you’re calculating your equity release costs:
1. Surveyor’s Valuation or Property Valuation Fees
Depending on your plan, you’ll be required to pay for a survey of your property. It’s one of the critical costs of equity release. Now, this happens even before you take out equity release.
What does this mean for you?
The surveyor will come and look at your property to determine its value. The surveyor will send your valuation report to your lender. It’s then your choice if you want to go with that specific surveyor or not.
These valuation fees are always dependent on the estimated value of your property. Better yet, most lenders do a free valuation nowadays.
2. Solicitors’ Fees
The Equity Release Council (ERC) has specific rules for taking out an equity release plan. Their rules state that your solicitor needs to be independent of the lender’s solicitor. You also need to have minimum one face-to-face meeting with that solicitor.
You might be wondering what then?
Well, if you’re satisfied with the offer and you choose to go ahead with it, you have to instruct a solicitor. It’s best if you select an expert independent equity release solicitor. They take care of all the legal work for you, and they ensure that everything works smoothly until your funds are released.
Best of all…
You’re free to choose your solicitor. However, it’s always better to handle your case by a solicitor with equity release transactions experience. Usually, you’ll pay roughly £1,250, depending on their criteria. Remember to include this cost in your equity release set-up costs.
3. Lender’s Application Fees
Once again, similar to a regular mortgage, you might need to pay an “application” or “admin” fee by the lender.
These fees generally cover legal costs and set-up costs. Depending on the lender and your recommended plan, the prices usually range between £0 to £695. Remember, adding it to your loan. It will accumulate compound interest.
Luckily, with so much competition among equity release providers, there are many special offers where you won’t be charged any application fees or cheaper admin fees.
What’s the Total Cost?
The estimated total cost is roughly £1,850. However, each application will be different. For example, some plans don’t require you to pay a lender’s application fee or a survey fee. It’s vital to speak to an expert equity release adviser so that you know beforehand what you’ll be paying.
Remember to add interest rates and financial adviser charges. Sometimes providers also require an admin fee.
If you’re seriously thinking about taking out an equity release plan, you’re comfortable with its rates, process and safety measures. You should have a chat with your financial adviser to find out what’s next.
Generally, initial costs will apply, and then interest will be charged as well. Interest rates are meagre at the moment: 2.25%! So it’s a great time to consider equity release. Some providers don’t even charge an admin fee anymore, due to the popularity increase and competition among providers/lenders.
You’ll receive a cash lump sum, or you can opt to receive a regular income from your released funds. The catch is you’ll need to repay that money when you die or need into long term medical care PLUS you’ll need to pay interest rates that have compounded over the course of your loan. These interest rates can be high or low, depending on how regularly and how much you’ve been repaying.
Depending on your age and medical health, you can get from 20% to 30% of the value of your home.
The equity release plan has an interest rate calculated on a fixed rate of compound interest. Interest is calculated each day but added to the loan amount monthly or yearly.
The interest rates are so reasonable in recent years that it’s such a great way to loan money! Equity release costs are essential to factor in if you’re considering equity release as a means of borrowing money. It’s also relatively easy to figure out if this is for you with the equity release calculator.
Always ask an expert for advice and don’t forget to do your research, so you end up with the best provider. Equity release doesn’t have to be complicated and expensive anymore!